Nov 13, 2018

Apple Does Have a Plan B. It's Suppliers, Not So Much

In a saturated market, Apple can charge fewer customers more money, as well as pivot to its broad array of high margin services. But the rest of the supply chain is going to suffer. JL

Jeran Wittenstein and Mark Gurman reports in Bloomberg:

In a world where iPhone demand is on the wane, Apple
has a Plan B. As customers wait longer between upgrades and the
smartphone market saturates, Apple can fall back on charging higher
prices for each handset and raking in more money from services such as
streaming music, digital videos and data storage. Apple
is increasingly touting its base of 1.3 billion installed devices,
rather than how many iPhones it sells each quarter. (But) “suppliers are more dependent on volume than
Apple. This
raises an incremental risk for the rest of the supply chain.”

In a world where iPhone demand is on the wane, Apple Inc.
has a Plan B. As customers wait longer between upgrades and the
smartphone market saturates, Apple can fall back on charging higher
prices for each handset and raking in more money from services such as
streaming music, digital videos and data storage.

But there’s no back-up for many of the companies that supply components for the iPhone.
The latest evidence that what’s bad for Apple can be terrible for suppliers came on two continents within hours of each other. Japan Display Inc., which gets more than half its revenue from the iPhone maker, cut forecasts. Then Lumentum Holdings Inc.,
a top maker of iPhone facial-recognition sensors, lowered its
second-quarter outlook. On Tuesday, Hon Hai Precision Industry Co., the
biggest assembler, missed estimates.

“Suppliers are more dependent on volume than
Apple,” said Woo Jin Ho, an analyst at Bloomberg Intelligence. “This
raises an incremental risk for the rest of the supply chain.” Apple
didn’t respond to a request for comment.

Faced
with a maturing smartphone market, Apple’s strategy has been to entice
customers to pay more for phones with new features such as facial
recognition and more vibrant screens.

The 3-D sensing components from companies like
Lumentum are found in iPhones that often cost more than $1,000. Fewer
people can afford to pay that much for a new device. But when a sale
does happen, suppliers get a one-time payment for their component, while
Apple can generate hundreds of extra dollars per gadget. In its
most-recent quarter, Apple reported almost no increase in the number of
iPhones sold, but revenue from that business jumped 29 percent from a
year earlier.

If demand for newer, pricier iPhones wanes, Apple
can cut component orders, or delay shipments, leaving suppliers with
more inventory. That makes them more likely to cut prices when Apple
comes back to the negotiating table.
Lumentum’s weaker sales forecast was the result of a shipment reduction
from its largest customer just a few days ago, Chief Executive Officer
Alan Lowe said at a conference in San Francisco on Monday. Lumentum
didn’t identify the customer and a spokesman for the company declined to
comment, but Apple is its biggest customer, according to data compiled by Bloomberg.
Apple
is increasingly touting its base of 1.3 billion installed devices,
rather than how many iPhones it sells each quarter. And the company has
been making changes to keep these existing customers happy while selling
more services to them.

“Apple
is no longer a traditional hardware business,” said Gene Munster, a
veteran Apple analyst at Loup Ventures. “The Apple investment paradigm
is moving away from a focus on device sales toward a more predictable
services-driven business.”
This year, Apple has taken steps to
lengthen the amount of time iPhones can be used. That will likely
discourage people from upgrading to newer devices -- another ominous
sign for suppliers.
Early in the year, the company confirmed it
had been intentionally throttling the speeds of some older phones to
avoid battery-related problems. After an outcry, the company offered
cheap battery upgrades, extending the life of many handsets.More
recently, Apple launched a new version of its operating system, iOS 12,
that supports an unprecedented 28 of the company’s devices, including
models that went on sale in 2013. Previous iOS upgrades supported
gadgets dating back several years, but this is the first time Apple has
prioritized enhancing the speed of older iPhones. The refreshed software
can open the camera on older iPhones 70 percent faster and the keyboard
50 percent faster, compared with iOS 11, last years’ update.

“Longer-lasting products could lead to higher
customer satisfaction, potentially enable Apple to charge higher prices
for its devices, and would help fulfill the company’s environmental
objectives,” Toni Sacconaghi, an analyst at Sanford C. Bernstein &
Co., wrote Monday in a note to investors.
That could extend iPhone
replacement cycles by six months to 3.2 years and push unit sales down
by 6 percent a year for three years, he estimated.
With
longer-lasting iPhones, users may be more likely to subscribe to new
services, making the devices more lucrative to Apple than just the
upfront cost. But these services are not additional revenue sources for
component suppliers.
While suppliers have fewer options, they are
reacting to a slower smartphone market. Like most device makers, Apple
prefers at least two suppliers for each component. The $3.2 billion combination
of optical component makers II-VI and Finisar Corp., announced last
week, will create a larger company that’s better able to negotiate on
prices

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As a Partner and Co-Founder of Predictiv and PredictivAsia, Jon specializes in management performance and organizational effectiveness for both domestic and international clients. He is an editor and author whose works include Invisible Advantage: How Intangilbles are Driving Business Performance.Learn more...